U.S. needs to drastically reduce spending

August 1, 2011

Freedom New Mexico

The party is almost over and it may be time to push for a debt-limit reduction in order to avoid another binge.

A lowering of the credit rating may be inevitable, even if Congress and President Obama work out a deal to raise the debt limit and pay bills. That’s because we’re in a financial mess. We are no longer a low-risk borrower. If our credit rating goes down, the painful hangover will begin. We will need an honest recovery program.

Today, government spends 40 percent more than it collects in taxes. It is like a household that earns $100,000 a year and spends $140,000 by misusing credit cards. Only it is much worse than that, if we account for the promises made to future retirees and veterans. The only hope is a dramatic reduction in spending, substantially more income or a measure of each.

For government, more income means levying higher taxes on those who produce wealth. For a variety of reasons — mostly wars and entitlements — our economy cannot afford new taxes. If we impose them, things will only get worse.

Here’s why. If we want children to eat less candy, we tax it more. It is simple math. If a child has $1 for candy, and each unit of licorice costs 10 cents, the child has capital for 10 pieces of licorice. If we impose a 10 percent tax, the child can afford only nine pieces of licorice. The child may decide to avoid licorice altogether if it costs too much. A child with 10 cents can buy no licorice once the tax is imposed.

The economic principle above does not change with scale. If we soak the rich with new taxes, they will have less capital to invest in wealth-producing endeavors and less incentive to put capital at risk. If we tax prosperity, we will get less of it.

Prosperity is taxable when it is flourishing. A wealthy child can afford a lot of candy even if it is heavily taxed. Unfortunately, prosperity is not flourishing in the United States and more taxes won’t cause it flourish. How bad is the economy? Super bad. It grew by a 1.3 percent annual rate last spring after nearly immeasurable first quarter growth. Consumer spending has flat-lined. Unemployment is 9.2 percent. This means we lack adequate prosperity to spend more on government. Despite stories about the opulence of a few, our country’s economy is a child who can barely afford candy, much less a new tax on candy. Class envy is the last thing we need in a country that cannot produce enough goods, services and commodities to afford its debts.

Mark Thornton, a senior fellow at the Ludwig von Mises Institute, explains the recovery that could result from a long-term lowering of the government’s credit limit. If government borrowed less from the credit markets, more capital would be available to the private sector — the only economic segment that generates wealth. A lower debt limit would force federal layoffs, freeing up talented labor to produce wealth in the private sector. It would force reductions in job-killing regulations, many of which are politically expedient but of negative value to society.

No sane individual would seek more debt in response to inadequate income. That would be idiocy. It is no less idiotic for the United States government. If we would lower the debt limit over time, after an emergency increase to pay obligations we’ve already incurred, we could balance the budget without the arduous task of amending our Constitution.